Thursday 18 February 2010 11.01 EST
First published on Thursday 18 February 2010 11.01 EST

European leaders have criticised Goldman Sachs and other investment banks following allegations that they helped Greece to disguise the true scale of its debts over several years.

"It's a scandal if it turned out that the same banks that brought us to the brink of the abyss helped to fake the statistics," Germany's chancellor Angela Merkel said in a speech at a conference in Germanylast night.

Eurostat, the European Union's statistical office, has already asked Greece to clarify the use of some derivatives contracts set up from 2001 with banks including Goldman Sachs. Greek officials and banking sources claim those contracts were legal until Eurostat stopped accepting them a few years later.

Countries that borrow money in foreign markets, such as Japan or the US, usually sign derivatives contracts to fix the value of the exchange rate at a point in the future, in order to avoid losing money if the currency of the country where the money is borrowed strengthens.

But in this case, bankers have claimed that Greece set an artificially low exchange rate, which meant the amount of debt it was taking on appeared lower. Goldman would hand Greece the difference upfront, to compensate for the loss. This money, which resembled a loan rather than a bond, would therefore not count as public debt.

Goldman Sachs has declined to comment on this issue. Today Yesterday Christine Lagarde, France's finance minister, said Eurostat should examine the issue closely.

"First of all, you have to know whether it was doctoring the accounts and if this was legal at the time it was done – and if it was legal, it will be necessary to find out whether it was favourable for stability. Probably not. And, in that case, how can we avoid a repeat, if those measures were already taken?" she told French radio station Inter.

The European Parliament's economic and monetary affairs committee has also urged EU commissioner Olli Rehn to explain the banks' role, and to specify what action he plans to take "to stop banks assisting European governments in hiding public debt", Arlene McCarthy, the committee's vice-president said recently.

Concerns about Greece's public finances have damaged the country's credit rating and credibility in the markets. The Greek government now has to pay higher interest to attract buyers for its bonds at the same time as it faces implementing drastic measures at home to cut its budget deficit.

The crisis is spreading towards other European countries with a high public deficit, including Spain, Italy and Portugal.